222 B.R. 514 (E.D.Va. 1998), 97-1238, Clerk of Circuit Court for Anne Arundel County v. NVR Homes, Inc.

Docket Nº:No. 97-1238-A.
Citation:222 B.R. 514, 10 Fourth Cir. & D.C. Bankr. 652
Party Name:CLERK OF THE CIRCUIT COURT FOR ANNE ARUNDEL COUNTY, MARYLAND, et al., Appellants, v. NVR HOMES, INC., Appellee/Cross-Appellant.
Case Date:July 17, 1998
Court:United States District Courts, 4th Circuit, Eastern District of Virginia

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222 B.R. 514 (E.D.Va. 1998)

10 Fourth Cir. & D.C. Bankr. 652



NVR HOMES, INC., Appellee/Cross-Appellant.

No. 97-1238-A.

United States District Court, E.D. Virginia, Alexandria Division.

July 17, 1998

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Mark L. Earley, Attorney General of Virginia, Paul S. Stahl, Assistant Attorney General, Fairfax, VA, J. Joseph Curran, Jr., Attorney General of Maryland, Julia M. Freit, Assistant Attorney General, Baltimore, MD, for Maryland Circuit Court Clerks.

Mark L. Earley, Attorney General of Virginia, Paul S. Stahl, Assistant Attorney General, Fairfax, D. Michael Fisher, Attorney General of Pennsylvania, Robert C. Edmundson, Senior Deputy Attorney General, Pittsburgh, PA, for Commonwealth of Pennsylvania.

Arnold M. Weiner, Snyder, Weiner, Weltchek, Vogelstein & Brown, Pikesville, MD, Allan P. Hillman, Nathan D. Adler, Neuberger, Quinn, Gielen, Rubin & Gibber, PA, Baltimore, MD, James M. Sack, Sack & Associates, McLean, for NVR, Homes, Inc.


ELLIS, District Judge.

At issue in this bankruptcy appeal are the following questions:

(1) whether the bankruptcy court properly declared certain post-petition, pre-confirmation real property transfers by debtor exempt from taxation pursuant to 11 U.S.C. § 1146(c); and

(2) whether debtor's initiation of a contested matter requesting a declaration that such transfers were exempt from taxation constituted a "suit" for Eleventh Amendment purposes.


During the 1980's, debtor NVR Homes Inc. 1 grew into a leading home builder and mortgage lending facility. Operating chiefly

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in the Virginia and Maryland suburbs of Washington D.C., NVR engaged in the practice of buying residential lots, building houses thereon, and then selling the improved lots at a profit. In 1987, in furtherance of its business operations, NVR purchased Ryan Homes, a home construction company. In connection with that acquisition, NVR incurred approximately $235,000,000 in bank debt to a consortium of eight banks ("the Bank Group"). It also issued approximately $220,000,000 in subordinated debt securities, consisting of notes and debentures.

As the real estate market declined in the late 1980's, NVR's decreasing operating profits prevented it from complying with its substantial debt obligations. In the face of mounting financial pressure, NVR was forced to develop and implement an operational restructuring, and to initiate negotiations with the Bank Group on a proposed restructuring of its working capital. Although NVR made progress in implementing this restructuring, the Bank Group declined to continue funding the enterprise after May 31, 1992. As a result, NVR filed a voluntary Chapter 11 bankruptcy petition on April 6, 1992.

The bankruptcy court granted NVR's first day motions, thereby authorizing NVR, as debtor in possession, to sell properties free and clear of liens, and to obtain secured, priority financing. In essence, the bankruptcy court's orders authorized NVR to continue to conduct its day-to-day business substantially as it had prior to commencement of its reorganization case, i.e., to acquire and dispose of lots in the ordinary course of business, and thereby avoid liquidation. Consistent with this authorization, NVR, from April 6, 1992, through September 30, 1993, engaged in 5,571 real property transfers in the States of Maryland, Pennsylvania, Virginia, New York, Delaware, and North Carolina. During that time, NVR paid in excess of $8.3 million in transfer and recordation taxes to those states and to certain local jurisdictions within those states. Of this amount, approximately $6.3 million was paid to various Maryland jurisdictions, 2 and approximately $600,000 was paid to various Pennsylvania jurisdictions. 3 These Maryland and Pennsylvania jurisdictions are collectively referred to herein as the "Taxing Authorities."

Because the NVR plan of reorganization confirmed by the bankruptcy court on July 22, 1993 ("the Plan") is central to the disputes at bar, a brief description of its history and contents is in order. Initially, NVR had anticipated that its pre-petition debt could be restructured and retired over time. Its first plan of reorganization was based on this assumption. Yet, because the Bank Group members would not agree to any plan of reorganization that did not provide for expedited payment of their claims, NVR developed the Plan that was confirmed by the bankruptcy court, and which provided for a public debt offering sufficient to cover the debt to the Bank Group. Specifically, the Plan required the sale of Senior Notes "in such an amount as will provide the Debtors sufficient cash to pay the Allowed Class 2 Claims and Allowed Claims in other Classes that are to be paid in cash on the Effective Date." The Plan also provided for the cancellation of NVR's subordinated debt securities in exchange for the issuance of approximately 91.1% of the initially outstanding equity interests in NVR. Thus, under the Plan, NVR creditors holding notes and debentures would receive shares of NVR in return for the cancellation of their subordinated debt securities.

To facilitate its implementation, and pursuant to 11 U.S.C. § 1146(c), the Plan, in section 4.13, exempted NVR's issuance and exchange of these securities from state and local taxes. It also exempted from such taxes any transfer of NVR's property made

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"under, in furtherance of, or in connection with the Plan." 4 And, in confirming the Plan, the bankruptcy court incorporated this language in its order, and retained jurisdiction over the "interpretation or enforcement of the Plan."

The Taxing Authorities were served with copies of the proposed Plan and related papers because they were creditors of the estate for taxes unrelated to the transfer and recordation taxes at issue here. None of the Taxing Authorities objected to the Plan, and, after the July 22, 1993 order confirming the Plan, none appealed, as they might have, 5 to the district court.

So far as the record reflects, the Plan was implemented without significant incident; the specified securities issued free from state and local taxation, the Bank Group members received payment of NVR's pre-petition debt, the subordinated debt security holders received their equity interests in NVR, and NVR's debts were canceled. All of this was accomplished prior to September 30, 1993, at which time NVR emerged from its Chapter 11 bankruptcy. Importantly, throughout the period of bankruptcy--beginning April 6, 1992 with the filing of the petition, continuing through July 22, 1993 when the Plan was confirmed, and concluding September 30, 1993 when the Plan was fully implemented and the bankruptcy period ended--NVR continued to operate its business as a debtor in possession, buying property, constructing homes, and then selling the homes. NVR paid transfer and recordation taxes relating to these transactions to various state and local taxing jurisdictions.

Thereafter, during 1994-95, NVR, citing § 1146(c) and the Plan, sought refunds from the various jurisdictions. Some of the jurisdictions, namely Virginia, New York, Delaware, and North Carolina, and the local jurisdictions therein, refunded to NVR all of the taxes collected. 6 However, the state and local taxing authorities in Maryland and Pennsylvania were less obliging.

In response, NVR initiated a contested matter pursuant to Rule 9014...

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